Overstock First to Use Digital Shares in Crawl, Walk, Run

Steve Kanaval |

I met Patrick Byrne in 2007 when short sellers raided his stock and I was the managing editor for a streaming media upstart in Dallas. We worked with Pat to get his story out, and he was a determined battler who stood up for what he thought was right. It was not a surprise to find out Pat and Overstock (OSTK) are the first public companies to trade in digital shares. The world’s first digital securities are at hand. The Securities and Exchange Commission has declared Overstock’s registration statement covering the issuance of digital securities effective. Byrne explained that Overstock has had a registration statement on Form S-3 on file with the SEC for the last eight months

The S-3 registers Overstock’s potential offering of various types of securities in digital form. The ownership and transfer of any digital securities actually issued will be recorded on a publicly distributed ledger. “We’re not looking to go around the regulators but rather work with them and get it right and be transparent about the process,” Byrne began. “We want to show that the blockchain technology works and is ready.”

Byrne explained that Overstock has not yet decided exactly what type of security it might issue, saying Overstock probably would not be interested in issuing equity securities at current market pricing.

“It will be an Overstock security that exists nowhere other than on the blockchain,” Byrne said. “Subject to appropriate back-up, it will be another demonstration that the technology works and is ready.”

This is part of Overstock’s so-called “crawl, walk, run” philosophy, Byrne said. First, the company issued a small private $500,000 digital bond to Byrne himself for the “crawl” phase. Second, for the “walk phase,” Overstock issued a private $5 million digital bond to an unrelated investor to show the technology worked on a slightly larger scale.

Now, Byrne said, it’s time for the run-phase - the issuance of a public digital security – but pointing out that any offer of any security under the registration statement would be made only by means of the prospectus and a prospectus supplement.

Overstock’s proprietary blockchain-esque system or platform is dubbed t0. The firm began its blockchain technology effort one year ago with the goal of using the blockchain and changing Wall Street processes, Byrne told Traders. t0 is FIX compliant and will be accessible as described in the registration statement.

“It is a home grown technology. Similar to the blockchain but unique to Overstock,” Byrne said.

The blockchain, he added, now refers to a broad area of ledger technology and not just a single system developed by one company. He said that many companies are developing their own ledgers and the blockchain is now an industry rather than a single system.

“We built our system to be ledger–agnostic and it can ride on top of bitcoin or other ledger systems,” Byrne said.

And it works. The firm’s $5 million private digital bond was recorded on Overstock’s proprietary blockchain-esq t0ledger system. As Byrne explained it, the security was issued and settled simultaneously, as the technology allows for streamlined clearing directly between the buyer and seller.

Historically, the clearing process has required or used a broker or other intermediary to act as a delivery agent between the buyer and seller in a financial transaction or trade. The broker takes custody of the security from the seller and transfers it to the buyer and the process can take several days. Typical settlement and clearing takes 3 days from the actual trade date, or T+3 in market parlance, but sometimes takes longer. Using the blockchain technology eliminates this delay.

“It’s a T+0 settlement now,” Byrne said. “It was really a demonstration of the process of how the trade is the settlement.”

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
OSTK Overstock.com Inc. 17.00 -0.20 -1.16 40,347

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